How to Calculate Gross Revenue

According to fundamental economic theory, if a company lowers the price of its products, they will sell more units, but the revenue per unit will be reduced. This "additional revenue"—the extra earnings gained from selling one more product—represents the marginal revenue.

Consider a lower price level and determine the number of products sold at that price. This step requires a specific market analysis.

Start with accurate data. Typically, you will need to access the company's inventory or revenue reports to determine the number of products sold. Finding the substitute price when selling an additional product is much more challenging and requires market analysis skills.

• Note, marginal revenue is only useful when analyzing a single product. Some reports may list data for product groups instead.

Avoid negative marginal revenue. Negative marginal revenue means the company will experience a loss in revenue if they reduce the price of the product. In this case, selling additional products will not offset the lower price per unit sold.

Understanding Marginal Revenue in Perfect Competition. In the previous example, we considered a simplified market model, assuming a single company without any competition (monopoly). However, in reality, companies often have to keep prices low due to competitive pressures. In perfect competition, marginal revenue does not change with the number of units sold because the product price is fixed.

• For example, Kim's soda company in the previous case must now compete with hundreds of other soda manufacturers. Each can of soda is priced at $0.50 — if the price is lower, Kim's will incur a loss, and if higher, customers will choose other brands. Marginal revenue is always $0.50 because Kim cannot sell at any other price.

Understanding Marginal Revenue in Monopolistic Competition. In reality, smaller companies create highly competitive environments that are not perfectly competitive. They do not immediately react to each other’s price changes, they lack full awareness of the competition they are facing, and they do not always set prices that maximize profit. This market system is known as "monopolistic competition." Marginal revenue generally decreases with each additional product sold, although it doesn't decrease as sharply as in a monopoly.

• For instance, Kim reduces the price of a soda can from $1 to $0.85. They may still generate additional revenue, but in a monopoly, customers would still purchase soda from a competitor at a higher price.

Understanding Marginal Revenue in Oligopoly Markets. In an oligopoly market, a few large firms compete with each other to dominate the market. Marginal revenue tends to decrease with each additional unit sold, similar to a monopoly. However, in practice, firms in an oligopoly usually do not want to lower prices, as this can trigger a price war, reducing profits for all involved. Typically, major firms in an oligopoly will only reduce prices to drive smaller competitors out of the market, then raise prices again to increase overall profits. If firms in an oligopoly agree to set prices in this manner, marginal revenue will depend on advertising and other factors, rather than price.

• Kim has grown into a major soda producer and now shares the market with Linda and Andy, two other soda companies. These three firms agree to sell soda at the same price, meaning the marginal revenue for each additional soda sold does not change, regardless of the price chosen. If Jeff were to start a smaller company and sell soda at a lower price to compete with their inflated prices, these three firms might temporarily lower their prices until Jeff is forced out of the market. They accept a temporary reduction in marginal revenue because they know they can raise prices again after eliminating Jeff.